Health Diagnostic Laboratory Files for Bankruptcy

Company owes about $49.5 million to settle civil probe into payments to doctors for blood samples

Blood samples are stored at Richmond, Va.-based Health Diagnostic Laboratory Inc., which reached an agreement with the Justice Department in April to settle an investigation of payments to doctors.
Photo:
Alexa Welch Edlund/Richmond Times-Dispatch /Associated Press

A cardiac biomarker laboratory that went from startup to industry giant in a few short years by paying doctors for blood samples has filed for bankruptcy protection.

The filing by Health Diagnostic Laboratory Inc. comes two months after the company reached an agreement with the Justice Department to settle a civil investigation into whether its payments to doctors amounted to kickbacks to induce them to order its tests. Under the pact, HDL agreed to pay nearly $50 million but denied wrongdoing.

HDL, which provides advanced blood tests that it says help detect heart disease at an early stage, said in a statement: “While we regret the necessity of seeking protection under Chapter 11, it is the right path for us to take, and we see it as an opportunity to better position our company for continued growth and success.”

HDL, based in Richmond, Va., grew quickly from tiny startup in late 2008 to a company with revenues of $375 million in 2013. Of that, $152 million came from Medicare, according to new payment data the federal program for the elderly and disabled released last week.

The company’s business began to unravel in late June 2014 when a fraud alert by the Department of Health and Human Services prompted HDL to stop its payments to physicians. A subsequent Page One article in The Wall Street Journal in September 2014 led HDL Chief Executive Officer
Tonya Mallory
to resign.

“The confluence of these events” and “certain payer issues and changes in billing practices in certain states that affected the fees earned by HDL from each sample test” hit the company’s business hard, HDL said in court papers filed Sunday.

HDL’s revenues fell by more than 47% in the second half of 2014, according to the court papers. By the first quarter of this year, the number of blood samples it processed daily had fallen by 50% from the 3,600 samples a day it processed in 2013.

The exterior of the Health Diagnostic Labratory Inc. building in Richmond, Va., shown in 2013.
Photo:
Richmond Times-Dispatch/Associated Press

HDL says that it owes $49.5 million to the Justice Department under the settlement agreement reached in April. Its bankruptcy filing may make it more difficult for the government to recover that money, though the government sought to protect itself by stipulating in the settlement that it had priority over creditors.

HDL didn’t respond to questions about whether it would be able to pay what it owes the government.

Since reaching its settlement agreement with HDL, federal prosecutors have turned their attention to doctors who received payments from the company, according to people familiar with the investigation. For some physician practices, HDL’s blood-sample fees totaled between $100,000 and $200,000 a year, according to internal company documents.

Prosecutors are also investigating the role of Ms. Mallory and BlueWave Healthcare Consultants Inc., HDL’s former sales-and-marketing contractor, in the alleged kickback scheme. Ms. Mallory and BlueWave’s two owners, Cal Dent and Brad Johnson, received compensation from HDL of nearly $200 million between 2009 and 2014, according to figures HDL provided in March.

A lawyer for BlueWave said in March that HDL was overstating what Messrs. Johnson and Dent earned. He didn’t respond to inquiries Monday.

Christopher Hall, Ms. Mallory’s attorney, declined to comment. In April, he said Ms. Mallory would “vigorously challenge the government’s evidence in court.”